Homeownership is a stage of life that most people dream about. Having a property to your name and a place to call your own is a big part of the ideal Canadian lifestyle. However, when it comes to owning your own home, there’s more to it than picking a floorplan that you like. There’s quite a bit of financial preparation that is required to ensure that you can get the house that you want. Understanding credit and your credit score is a big part of being financially prepared to own a home. So, here’s a quick breakdown of what credit is and why it's essential when it comes to purchasing your own home.
What is credit?
Credit, simply put, is borrowing. It factors in your ability to borrow money, the amount of money you borrow and your ability to pay it back in a timely manner. Your credit score, on the other hand, is a three-digit number which lets banks and other financial institutions know how likely you are to pay off your debts. In Canada, your credit score can range anywhere from 300 to 900. A credit score of 300 means you’re most likely just starting to build up your credit, while a score of 900 means you have excellent credit.
How is your credit score calculated?
Each credit reporting organization calculates your credit score based on their unique formula. However, some general things that factor into your credit score calculation include:
Payment history: This refers to how timely your credit card payments are – late or missed payments will result in a lower credit score.
Balance-to-limit ratio: This refers to how much monthly debt you have in comparison to your monthly limit. Its suggested that you keep your credit card balance around 35% of your limit.
Account history: This simply refers to how long your credit account has been open for. The longer the account history, the higher your credit score.
Credit variety: It suggested that having a variety of credit accounts is best. A healthy mix of credit products like car loans, credit cards etc. can help you improve your credit score if used properly.
How does credit score play a role in home ownership?
Since your credit score lets lenders know how likely you are to pay off your debts, it plays a big role in your ability to secure a mortgage loan and eventually own a home. When you apply for a mortgage loan, as most buyers do, your lender will have to analyze your reputation as a borrower. They’ll usually do this by looking through your credit history and analyzing your credit score. This information will help lenders decide whether or not you qualify for a mortgage loan and how high your interest rate should be. Your credit score also determines what type of lender you can get a mortgage loan from.
So, you’re probably wondering, what’s the minimum credit score you should have in order to get a mortgage approval? Well, the magic number is 650! A credit score of 650 and above will get you approved for most loans from banks and other traditional financial institutions. However, if your credit is much lower than this, you may have trouble getting approved. This is because the lower your credit score, the less likely banks will believe that you’ll make your mortgage payments on time or at all. Luckily, there are smaller private lenders and trust companies who are willing to consider people will low credit scores for mortgage approvals.
Dealing with your finances can be a scary part of the home ownership process. However, it’s nothing a little information and guidance can’t solve. Don’t hesitate to talk to a mortgage professional or seek help from current homeowners in order to learn more about credit and mortgage approvals.